- Inflation remains low, but the re-heating housing market, in particular, is complicating the policy outlook.
- We retain our call for the next OCR cut in June, but an April move is “live”.
- Meanwhile, we see a growing risk of tightening housing market restrictions.
While Q1 inflation data were a touch on the strong side of expectations, the overall picture of muted inflation remains. All up, annual inflation increased 0.4%, the sixth consecutive quarter that inflation has been below the RBNZ’s target band. With no smoking gun in the Q1 data, attention returns to the other factors in play.
In particular, the NZD remains uncomfortably high. At the time of writing, the trade-weighted index was 72.83, sitting well above the RBNZ’s forecast of 70.9 for the end of Q2. Indeed, if anything, we expect the NZD to climb further above the RBNZ’s forecasts over the course of the year.
In addition, global events have thrown another curve ball the RBNZ’s way. Namely, European economic weakness has weighed heavily on European banks, leading to an increase in global bank funding costs. This increase culminated in local banks not passing through to floating rates the full amount of the March OCR cut.
Normally these factors would make the case for further prompt OCR cuts clear, but the re-heating housing market has complicated the outlook. With interest rates historically low, nationwide house sales jumped nearly 5% over March. And the jump in sales coincided with the nationwide stratified median sales price lifting 13.3% compared to March 2015.
With the housing market reigniting, the Reserve Bank’s investor and other housing restrictions are beginning to seem “long ago”. The Auckland-centric investor restrictions, for example, have simply sent some investors further afield. Some data suggest that Auckland investor buyers accounted for circa 20% of Whangarei and Tauranga sales over the first three months of the year.
So the question is, how does the RBNZ push inflation back to target without further stoking the housing market? If housing data over coming months confirm the re-acceleration, then we expect one way could be to broaden the investor restrictions later in the year from ‘Auckland only’ to nationwide. Alternatively, the investor deposit requirement of 30% could lift to say 40%
These increased restrictions would free up the RBNZ to make the 50bps of OCR cuts that we expect in June and August this year. The above housing complications as well as the slightly stronger Q1 inflation data suggest that the RBNZ may see little urgency to cut rates. In saying this, we cannot completely discount an April cut.